ContourGlobal PLC (LON: GLO): Sustainable business model and offering a decent dividend yield

ContourGlobal PLC is a FTSE-250 listed Power Generation Company with operations in 18 countries across three core regions, namely Europe, Latin America, and Sub-Saharan Africa. It has nearly 4,845 MW in operation in 18 countries, with a portfolio of 107 thermal and renewable power plants. The Company seeks to acquire wholesale power generation projects with a long-term contract diversified across fuel types and develop those through applying technical and management expertise in traditional and innovative technologies.

It was founded in the year 2005 by Joseph Brandt and Reservoir Capital Group and began operations in 2006 with the development of a 25 MW run-of-river hydroelectric facility in Brazil. The Company got listed on the London Exchange in November 2017 and is a constituent of FTSE 250 index. Presently, with a proven track record of refurbishment and development expertise, it is well-positioned to capitalise on market opportunities, and its portfolio includes 101 powerplants which utilise a wide range of fuel types, technology, and equipment. It has a large global footprint diversified across geographies and technologies which is focused on wholesale contracted power generation producing low-risk and long-term cash flows.

 (Source: Company Website)

Recent Trends of Dividend Payment

As of 30 June 2020, GLO has returned US$260 million in cash since listing, which is equivalent to 15% of market capitalisation. In FY19, the Company decided to disburse dividends in four quarterly instalments. The total dividend for FY19 stood at US$99 million, while the Q4 FY19 dividend stood at USD 3.6901 cents per share.

For Q2 FY20 (ended 30 June 2020), the Company approved a quarterly dividend payment of USD 4.0591 cents per share, which is equivalent to US$27.03 million. It targets 10% year-on-year growth in dividends, which is supported by a robust and predictable cash flow generation.

The last dividend declaration date, ex-dividend date, and dividend payment date were 10 August 2020, 3 September 2020, and 25 September 2020, respectively.

(Source: Company Presentation, chart created by Kalkine Group)

Growth Prospects and Risk Assessment

Despite the Covid-19 pandemic, GLO faced no material impact on financial performance during H1 FY20, as there was no delay in cash collection and no consideration demand reductions. It reflects the resilience and flexibility of the business model. Moreover, the ongoing share buyback (with £8 million repurchased) reflects that the shares do not reflect the intrinsic value. Also, it is growing investments in cleaner technologies to provide reliable and low-cost electricity. Furthermore, it usually undertakes fixed-price and long-term contracts which ensure limited credit risk, cost risk, price risk, and refinancing risk.

 (Source: Refinitiv, chart created by Kalkine Group)

Presently, the Company has more than 100 assets across 4 continents with 4.8 GW capacity, 24% compounded annual growth in Fund from Operation since FY15 and delivering 10% annual dividend growth. It has a proven track record in both greenfield development and M&A delivering value accretive growth. Overall, GLO is an established power generation entity with an exceptional growth profile and strong cash generation.

However, the Company is under the risk that its operational costs would increase, or it would face a loss of business and growth opportunities due to the macroeconomic and political conditions such as geopolitical uncertainty. The forecasted revenue from a project may turn out to be lower due to the risk of climate change. 

Industry Outlook Dynamics

The Global electricity demand fell by 2.5% in Q1 2020 as lockdown measures impacted the commercial and industrial operations, which also outweighed the increase in residential demand. The slower economic recovery and longer lockdown can impact the demand even further in the short-term. According to the Business Research Company, the global power generation market is projected to surge at a CAGR of ~3.5% between 2018 to 2022 and reach nearly US$1,537.5 billion by 2022 from around US$1,341.6 billion in 2018. The key market driver includes government initiatives for energy infrastructure, land scarcity for solar generation, increasing residential demand, increasing share of renewables in electricity supply.

Key Fundamental Statistics

A Glimpse of Business Segments

The breakup of Revenue and Adjusted EBITDA by business Segment for H1 FY2020 are as follows:

(Source: Interim Report, Company Website)

The breakup of revenue by Geographic Segments for H1 FY2020 are as follows:

(Source: Interim Report, Company Website)

Key Shareholders Statistics 

Recent Developments

On 22 September 2020, ContourGlobal announced the extension of Share buyback programme to 30 September 2020. Till date, the Company has repurchased 6,033,570 million shares at £10.6 million of total cost and at an average price of 176.3 pence.

Key Performance Indicators

(Source: Annual Report, Company Website)

Financial & Operational Highlights – H1 FY2020 (30 June 2020)

(Source: Interim Report, Company Website) 

• In the first half of the financial year 2020, the Company showed strong financial performance, with a 10% increase in revenue and 11% increase in income from operations.
• The profitability for the period improved, driven by the acquisition of assets of Mexican CHP.
• The Company’s operational and financial performance is not materially impacted by the impact of the covid-19 crisis.
• GLO’s funds from operations remained stable at USD 172 million, with higher cash conversion of 49% for the period.
• The Company announced a quarterly dividend of 4.0591 cents in Q2 FY2020 and remained committed to year on year dividend growth of 10%.
• The Company since 1 April 2020 bought back shares of £8 million under the share buyback plan.
• ContourGlobal maintained adjusted EBITDA guidance for FY2020 of in between USD 710 million to USD 745 million.
• The outlook for the acquisition of assets and future growth remained positive, along with robust financial performance.
• During the pandemic, the Company’s business was classified as an essential business in all 18 countries in which it operates.
• The Company since inception is focused on the safety of the workforce, which can be seen in an industry-leading LTIR (Lost Time Incident Rate) of 0 during H1 FY2020.

Financial Ratios – Strong Profitability & Liquidity Position versus the Industry Median

Reported profitability metrics for the first half of the financial year 2020 stood in line with the industry median and higher than the last year data for the same period, reflecting higher revenue and better control over expenses as compared to the industry. ContourGlobal Plc has delivered a substantial return for the shareholders’ as return on equity of 21% was higher as compared to the industry median of 4%. On the liquidity front, ContourGlobal Plc’s current ratio was slightly lower than the industry median of 1.45x but has sufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio was 13.19x, which was significantly higher as compared to the industry median of 1.67x, reflecting that the company is more leveraged as compared to the industry.  

Share Price Performance Analysis

 (Source: Refinitiv, chart created by Kalkine Group)

On 9 October 2020 (before the market close, at 11:25 AM GMT+1), ContourGlobal Plc shares were trading at GBX 195.80, up by 0.41% against the previous day closing price. Stock 52-week High was GBX 226.50 and Low of GBX 120.00, respectively. From the technical standpoint, shares were trading above the short-term support level of 200-day (GBX 185.76) simple moving average prices, which reflects an uptrend in the stock.

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

(Source: Refinitiv, chart created by Kalkine Group)

Business Outlook Scenario

Following the strong H1 FY20 performance, GLO maintained the guidance of adjusted EBITDA to remain between US$710 – US$745 million in FY20. Moreover, the robust and stable cash flow supports the commitment of 10% growth in dividend per share. The Company is focusing on low carbon technologies, which provides a visible pipeline for future growth. It is well-established to capitalise the accelerated growth in developing markets, and its footprint would enable it to benefit from changes in global demand. It seeks to expand through additional development and acquisition globally. The Company is targeting an increase in earnings to achieve the aim of 100% rise in adjusted EBITDA by the end of 2022.

According to the International Energy Agency, most of the increase in global demand will occur in developing markets, while lower economic growth, energy efficiency policies and stabilised energy consumption patterns will lead to lower growth in electricity demand in developed markets such as Europe and the United States.

The Company has a positive outlook for growth and acquisition of assets, considering the strong liquidity of US$633 million (as of 30 June 2020). It is focused on the modernisation of its renewable, storage and thermal generation facilities and its pipeline remained robust. 

Considering the robust financial performance, decent operational performance and support from the valuation as done using the above method, we have given a “Buy” recommendation on ContourGlobal Plc at the current price of GBX 195.80 (as on 9 October 2020, before the market close at 11:25 AM GMT+1), with lower double-digit upside potential based on 19.55x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).  

*Dividend Yield may vary as per the stock price movement.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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